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As public companies navigate the 2015 proxy season, a potential change to executive compensation disclosure is on the horizon. The US Securities and Exchange Commission (SEC) has proposed new rules to implement the "pay-versus-performance" disclosure requirement under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules would mandate and standardize companies' "realizable" and "realized" pay disclosures and compare them to total shareholder return (TSR).
Under the proposed rules, a US public company will be required to add a new "Pay Versus Performance Table" to its proxy statements that shows the pay of its named executive officers (NEOs) as shown on the Summary Compensation Table (SCT), and an adjusted pay number representing compensation "actually paid," as defined in the proposed rules. The Pay Versus Performance Table will also report the company's total shareholder return and the aggregate weighted of its peer group. Companies will still be permitted to show "realized" or "realizable" pay in their proxies, but the new Pay Versus Performance Table will provide a uniform presentation of compensation data for shareholders to compare across companies.
Click here to read proposed rule.
The following format is required for the Pay Versus Performance Table under the proposed rules:
As proposed, the Pay Versus Performance Table would show the total compensation figure taken directly from the SCT for the principal executive officer (PEO), and it would show the average total compensation for the year for the other NEOs. The average is used because the SEC believes that the identity of the NEOs other than the PEO changes frequently, and it might not be as helpful to shareholders if the other NEOs were shown individually. PEOs also change with some frequency, and the proposed rules provide that, in such instance, the table should reflect the sum of the compensation paid to all PEOs during the year.
As proposed, the Pay Versus Performance Table would show compensation for the current year (i.e., the year for which the proxy statement is filed) and each of the four prior years. This four-year look-back requirement phases in over three years, with only the current and two prior years' compensation required to be shown the first year the new rules are in effect. In the second year the rules are in effect, four years' actual compensation must be shown. The full four-year look-back will apply in the third year the rules are in effect.
The Pay Versus Performance Table would repeat the total compensation figure from the SCT, so that shareholders can compare data without having to look up the current or historic figures. "Actual" pay information in the new table is to be derived from the company's SCT with two specified adjustments designed to convert the "compensation awarded to, earned by or paid" to a named executive officer shown in the SCT to compensation "actually paid."
To derive the compensation "actually paid" to the NEOs, the SCT total compensation figure must be adjusted (and shown with appropriate footnotes describing and quantifying the adjustments) as follows:
The proposed rules do not require any particular valuation method, and they do not require the company to use the same valuation methodology in reporting the grant date fair value and the vesting date fair value, but the differences would need to be explained in a footnote.
The Pay Versus Performance Table must report the company's TSR determined in the same manner as for the company's "stock performance graph" required to be shown in the annual report. The new table must also show the aggregate weighted TSR for the peer group. The peer TSR may be based on the peer group used for that stock performance graph. Alternatively, a company may opt to use the peer group used to benchmark executive compensation, as disclosed in its compensation discussion and analysis (CD&A). The aggregate weighted peer group TSR is based on each peer group member's stock market capitalization at the beginning of the applicable fiscal year.
In addition, the company would be required to describe the relationship between the reported compensation actually paid to its NEOs and the company's TSR compared to the TSR of its peers.
The SEC proposes using TSR as the relevant performance measure because it takes into account the change in value of shares as well as dividends and distributions. Under the proposed rules, companies that do not find TSR to be an appropriate indicator of company performance may supplement the Pay Versus Performance Table by providing supplemental performance measures, as long as TSR is included in the new table, and the other measures are clearly identified.
The disclosure in the new Pay Versus Performance Table would be subject to a company's regular "say on pay" vote. The proposed rules do not require the new table to be included in any particular section of the applicable proxy statements, but the SEC generally suggests including it with the other tables showing executive compensation instead of the CD&A, unless the company's compensation committee considered the disclosure in making compensation decisions.
Emerging growth companies, registered investment companies and foreign private issuers are not subject to the proposed rules. In addition, special rules apply under the proposed rules for smaller reporting companies.
While many companies will wait until the proposed rules become final to undertake a full-blown analysis of the requirements, there are some preliminary steps companies should consider taking now to prepare:
The comment period for the proposed rules remains open through July 6, 2015, and the rules are not expected to become effective prior to the 2016 proxy season.
This alert is intended to briefly summarize the proposed rules. If you have any questions about this alert, or need assistance in preparing comments on the proposed rules, please contact the Dentons lawyer with whom you normally work or any member of Dentons' Pensions, Benefits and Executive Compensation team.
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